Does raising the minimum wage reduce poverty?

Should we raise the minimum wage? That is a question presently under consideration by legislators in states like California, Connecticut, Massachusetts, New Jersey and New York. In addition, U.S. Sen. Tom Harkin, D-Iowa, has introduced a bill to raise the federal minimum wage to $9.80 per hour.

The minimum-wage debate typically revolves around jobs – specifically, whether employment consequences for the least-skilled jobseekers outweigh the benefits received by low-wage earners who keep their jobs. A less discussed but potentially more relevant policy question is whether the minimum wage actually delivers the goods to low-wage employees. That is, do higher minimum wages help more people their pay bills and make ends meet, as advocates claim?

New research I co-authored with Robert Nielsen at the University of Georgia suggests minimum-wage increases fail spectacularly at this task.

The link between a higher minimum wage and a reduction in poverty has always been tenuous. Even economists David Card and Alan Krueger – who famously authored a study suggesting that a wage hike in New Jersey had increased fast-food restaurant employment – expressed skepticism that the minimum wage was an effective anti-poverty tool. More recently, a study I co-authored with Richard Burkhauser of Cornell University and the University of Melbourne found that minimum-wage increases in the mid-to-late 2000s had no effect on state poverty rates.

There are three principal reasons for the minimum wage’s disappointing track record on poverty reduction. First, more than half of all poor Americans age 16 to 64 do not work; thus, minimum-wage increases will be ineffective at reaching these individuals. Second, minimum-wage increases tend to be poorly targeted; a majority of minimum-wage earners are not the sole breadwinners in their households, and many are living in middle- or upper-middle-class families. Nearly 87 percent of the beneficiaries of the last federal minimum-wage increase were living in nonpoor households. Finally, if employers respond to a wage increase by cutting employees’ hours or jobs, a higher minimum wage could move some households into poverty rather than lifting them out of it.

Compelling as these arguments are to the vast majority of labor economists, they have largely been unable to trump the heartstring-tugging rhetoric about families in hardship. For instance, when then-Sen. Barack Obama was campaigning for president in 2008, he supported a higher minimum wage so that families could “pay for basic needs such as good transportation and housing – things so many people take for granted.”

In our new study, supported by the Employment Policies Institute, Nielsen and I use data from the Census Bureau’s Survey of Income and Program Participation to move beyond abstract measures of poverty and meaningfully measure the impact of a higher minimum wage on several measures of maternal hardship. For instance, does a higher minimum wage reduce the number of people who have difficulty paying medical or utility bills, or making a mortgage payment? Does a wage hike reduce the number of people who lack sufficient resources to purchase a balanced meal?

In all, we constructed 10 different measures of family hardship to evaluate the effectiveness of a higher minimum wage. And across all 10 definitions, we found no evidence that minimum-wage increases had reduced material hardship.

The data confirm overwhelmingly that the minimum wage is missing the mark. For instance, nearly 54 percent of less-educated individuals who missed a rent payment in the last year were not working; a similar percentage was found for individuals who had missed a utility bill, could not meet their monthly expenses, or were receiving some type of energy or housing assistance. These Americans (and their families) don’t need a wage increase – they need a job. A higher minimum wage would simply put that job further out of reach.

Fortunately, there is a better alternative for policymakers who wish to reduce material hardship. While minimum-wage increases are largely ineffective anti-poverty tools, we found that a 1 percent increase in a state’s refundable Earned Income Tax Credit reduced state poverty rates by 1 percent. One reason for this is the EITC’s great success in incentivizing labor force participation, particularly for low-income single mothers.

Reducing material hardship is a laudable policy objective that enjoys widespread bipartisan support. But raising the minimum wage is not the answer. At best, it is an ineffective strategy for helping those in hardship to make ends meet and at worst hurts many of the same vulnerable individuals that policymakers wish to help.

Sabia is an assistant professor of economics at San Diego State University.